The Relationship between Democracy and Economic Growth of Pakistan: A Cointegration Analysis

Abstract

Institutional quality is considered the major cause of income difference among the nations of the world. The primary objective of this research work is to analyze the nexus between institutional quality with a special emphasis on democracy in the economic growth of Pakistan. Economic growth is measured by Real Gross Domestic Product (RGDP), and democracy is quantified by democratic accountability (DA). Time series data on democratic accountability (DA), human capital (HC), infrastructure (INF), inflation (DEF), and RGDP from 1984 to 2018 have been utilized. Using the Johansen Cointegration approach, the results showed a long-run cointegration between the variables. Johansen Normalized results showed that democratic accountability, infrastructure, and human capital have a direct and statistically significant effect on Pakistan‟s economic growth. Similarly, Vector Error Correction Model (VECM) exhibits that the computed value of ECT (-1) is statistically significant, negative, and less than 1, these results confirm the convergence of the variables towards its mean position. The VECM confirmed the existence of a long-run relationship between democratic accountability and the economic growth of Pakistan. Moreover, the results showed the short-run relationship between the variables. Granger causality showed a unidirectional causality is running from democratic accountability to economic growth. The results of diagnostic tests also revealed the absence of autocorrelation and heteroscedasticity with the normality of residuals. Based on the econometric results, this study recommends that elected governments should establish such procedures and mechanisms that strengthen and support the democratic system and respond to people‟s problems to achieve sustainable economic growth in Pakistan